Forex Trading For Beginners

Your Introduction to the Forex market – Part 2

            Understanding the Forex market requires you to develop the ability to separate concepts that you need to understand from terminology that you need to memorize and get comfortable with using.  In the beginning you do not know any terms and you do not understand any concepts so telling the difference between the two can be quite challenging!  This process requires a stepwise approach that leads you to learning the terminology first, trying to understand the concepts second and then repeating the process until it all starts to make sense.  In this article, I will discuss some of the basic terms that you need to become familiar with in order to gain an initial concept of what the Forex market is and how it functions.

            The first term that you should become familiar with is the PIP.  In Forex trading the money is in the PIPs, the more PIPs you make in each transaction the more money you have in your account.  The more PIPs you lose, the less money there is in your account, it's that simple.  PIP stands for Percentage In Point and it is equal to 1/100^th of a percentage point, 0.0001.  It usually corresponds to the fourth decimal point in a price quote.  (ie. 1.0001 and 1.0006 is a difference in 5 PIPs) and a PIP is the smallest percentage point that can be earned in a currency transaction.  The need for using PIPs in currency exchanges arises from the very small fluctuations in currency values observed during a normal day of trading, usually around 1%.  Since you make money based on taking advantage of the price fluctuations a small unit of measure is needed in order to follow the changes in price and determine whether you are doing good or bad.

            You enter the Forex market by buying a currency pair at a price quoted to you by your broker.  You make this purchase expecting that the currency you purchased will increase in value relative to the partnered currency in the pair.  This increase in value will be represented by an increase in PIPs.  If all goes as you predicted and the currency you bought becomes more valuable, you must sell the new, more valuable currency back to your broker in order to turn your PIPs into dollars and get out of the market.  So in order to have actual money deposited in your bank account you must actually participate in two transactions, a purchase of a currency pair when the price is down (Buy Low) and a sale of the same currency pair when the price is up (Sell High).  While this concept is fairly easy to grasp, it is what goes into the decision of when to buy or sell so that you make a profit that is somewhat difficult to understand in theory and extremely difficult to do consistently in practice.  Adding to the complexity of this decision making process is the next term you must become familiar with, the spread.

When you enter the Forex market by purchasing a currency pair, A/B, you are quoted a price at which your broker will purchase currency A and/or sell currency B.  This price quote is based on two things, the current marketplace pricing on the given currency pair and the broker's spread.  The spread represents an added differential between the currency pairs relative values expressed in PIPs.  The spread also represents your broker's potential profit margin on the deal he makes with you.  I will talk more about the spread and what it means for you and your broker in the next article.  For now I will explain it by saying that it serves a dual role of providing the incentive for the broker to offer their services and is a principle driving force that mandates that the buyer participates in the marketplace.  In essence if forces you to enter the market for atleast some minimum amount of time, effectively making you 'play the game'!

See you next article!

John Q

www.saveyoursmile.com

P.S. - Are you looking to learn more about the Forex market? 

Click on the following link and learn about 3resources for learning more about currency trading - www.saveyoursmile.com/Forex-overview.html

Disclaimer:  This article is provided strictly for informational purposes only!  It is not intended for professional use.  I am learning about the forex market just like you so please if you are planning on actual trading the forex seek professional advice.  Just so we are clear on this point, below you will find the mandatory governmental disclaimer:

U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risks. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.

CFTC RULE 4.41 - HYPOTHETICAL OR SIMUL ATED PERFORM ANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTU AL PERFORM ANCE RECORD, SIMUL ATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.